Livestock Profits Depend On Demand, Here & Abroad

“Tough times across the livestock sector can get better this year, but it will take demand, demand, demand,” says Scott Brown, economist with the Food and Agricultural Policy Research Institute (FAPRI).

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“Tough times across the livestock sector can get better this year, but it will take demand, demand, demand,” says Scott Brown, economist with the Food and Agricultural Policy Research Institute (FAPRI).

“Supply is not the problem. We need a return of consumer confidence,” Brown told University of Missouri Extension livestock specialists recently. “When consumer confidence was chopped in half, we went into uncharted territory. There will be recovery when consumers are ready to spend, but it will require people getting jobs.”

There are bright spots in the economy. Economic growth was up 5.7% in fourth-quarter 2009, which was unexpected, he says. And, there’s good recent news in the financial markets.

In addition, pork prices have begun to rebound in 2010 after extended low prices, thanks to stronger exports. But lower beef exports have hurt prices, and the complete return to some Asian markets isn’t expected soon.

A loss of chicken exports to Russia also works against beef, Brown says. While Canada and Mexico are top customers of U.S. beef, chicken that had gone to Russia now goes south of the border, where it competes with our beef.

The strength or weakness of the U.S. dollar also affects ag trade. As the U.S. dollar drops in value, export sales become easier, increasing our net meat exports, Brown says. “If our dollar strengthens in the world market, it will hurt our exports, big time!”

Beef also lost demand for quality cuts at high-end restaurants, but sale of prime cuts at retail has increased. “People buy steaks and take them home to cook,” he says. “We’ve got the supply to meet that demand.”

Brown says predicting meat prices has become more complicated because so many factors worldwide affect meat consumption. “It used to be if we could figure out the beef supply, we could tell you the retail price of steaks.”

A recovery in demand based on economic recovery brings other downsides into play. As consumers get more money, they use more energy. While crude oil is currently below $70/ barrel, if energy demand increases and oil heads up to $90/barrel that will draw money out of consumers’ pockets, which will affect buying habits.

Short-term economics may affect the long-term health of the beef industry, Brown says. As feedlots face losses, more will close, which could jeopardize some packers’ viability. “We may be losing infrastructure that we need long term,” he says.

Feed costs also affect meat production and those costs are affected by energy prices.

“Crude oil prices matter a lot,” Brown says. “Now corn prices are tied to the movement of fuel prices. We’re not likely to see those long-term corn prices of $2/bu. It’s possible, but not very probable.

“Those higher feed costs add 40% to the cost of raising livestock,” he says. “We used to talk of an annual growth in meat supply of 3-4%/year. Production is down as we go through a period of adjustment, facing the higher feed costs.”-- Duane Dailey, University of Missouri